Veteran developer Martin J. Kenny, of Hartford-based Lexington Partners, said apartments are probably among the safest investments during periods of high inflation, but he sees a heightened number of projects going underwater as interest rates and construction costs soar.
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Veteran developer Martin J. Kenny, of Hartford-based Lexington Partners, said apartments are probably among the safest investments during periods of high inflation, but he sees a heightened number of projects going underwater as interest rates and construction costs soar.
“I see a lot of people with variable interest rates getting into workout modes,” Kenny said. “I see workouts coming. I see lenders coming to people like us to see if they are getting the keys handed to them.”
Kenny anticipates that an increased number of developments that have recently received local land-use approval, or are in the process of doing so, will end up not breaking ground as elevated costs upend profit margins. Smaller cities and “secondary zip codes” like New Britain and East Hartford will likely be the first to be impacted, he said.
Kenny said he is more confident about Hartford’s blossoming apartment market because of the involvement of the Capital Region Development Authority. The quasi-public development agency has incentivized and coordinated apartment development in Hartford over the past decade by offering developers access to low-interest loans made possible by state funding.
The Capital City’s success will depend, in part, on the efforts by developers and municipal officials to revive retail and entertainment options, in areas like Pratt Street, Kenny said. He has been encouraged by the results yielded by the city’s Hart Lift program, which offers matching grants of up to $150,000 to offset costs of outfitting retail and restaurant spaces.
A lot will also depend on the broader economy, Kenny said. A recession could cause building material suppliers to tighten their belts and lower costs.
RMS Cos. CEO and President Randy Salvatore, developer of Hartford’s North Crossing mixed-use apartment project near Dunkin’ Donuts Park, said 2023 will be a challenging year for developers as economic hurdles continue to mount.
However, experienced and well-funded developers could find a balance that will help the long-term profitability of quality projects.
Construction costs and interest rates will remain challenges this year and demand will be in question if the economy falters, Salvatore said. At the same time, a slower economy could tame rising interest rates and construction costs.
“I think construction costs and supply chain will ease a little bit as things slow down toward recession,” Salvatore said. “These are normal economic trends.”
Tighter inventory
Thuyan Tran, vice president of commercial investments with Vanguard PCG, said multifamily property sales began to cool entering the third quarter of 2022 as buyers paused to see how the market settles.
Rising interest rates, soaring property valuations and general market volatility will be the three biggest factors in the multifamily sales market heading into 2023, Tran said.
“I believe that the increased interest rates and general market volatility will cause a decrease in acquisitions,” Tran said. “If interest rates continue to increase, sellers will have to reset their expectations, as most savvy buyers will wait until the market evens out.”
Soaring property assessments during the pandemic will mean higher tax bills for multifamily owners, dampening the enthusiasm of out-of-state buyers, Tran added.
“While rents have certainly increased, the common consensus has been that the tax burden outweighs the higher rents collected,” Tran said.
The higher rates and shrinking pool of buyers could also tighten the inventory of available multifamily properties, as investors decide to hold onto assets until the market rebounds, Tran said.
“Ironically, this will lead to a shortage of inventory, which will increase prices over time,” Tran said.
“I believe the multifamily sector will subtract moderately through 2023,” she added. “It will still be easy to liquidate due to the supply chain shortage, and those buyers will see solid returns coupled with appreciation. Finally, there is still a strong demand for rentals as it is still more affordable to rent than purchase at today’s rates.”
